Annual sales within the eurozone are still capped by the central bank gold agreement at 400 tons per annum. The current agreement runs to September 2014. Sales for the current quota year to September 2013 are well bel..

20 Apr 2013

LONDON (Commodity Online): Central banks around the globe are expected to continue with gold purchase and activity thus far this year has been firmly on the demand side, stated London based Barclays in its recent market analysis.

Reported data to February show net buying of 29.7 tons so far, with limited appetite to sell. The bank expects net central bank buying to reach 300 tons in 2013 and a similar magnitude for 2014.

Other European central banks do have larger gold reserves. Spain holds 281.6 tons of gold, making up 29% of its reserves. Both Greece and Portugal hold a much larger share of their reserves in gold, with Greece holding 111.9 tons making up 82%, and Portugal holds 382.5 tons representing 90% of its reserves.

However, annual sales within the eurozone are still capped by the central bank gold agreement at 400 tons per annum. The current agreement runs to September 2014. Sales for the current quota year to September 2013 are well below the annual allowance, currently under 4 tons; thus, theoretically, there is plenty of room for additional sales.

Recent selling has been muted, with only Germany selling around 5 tons for its annual coin minting programme; before then, France had sold 9.1 tons in September 2009. Aside from other countries actively managing their reserves, this would be the first sale across eurozone banks in three-and-a-half years.

The potential sale of Cyprus’ excess gold reserves as an option considered to help fund part of its bailout sparked concerns that other central banks could be asked to follow suit, leading to a structural shift in official sector policy and activity and creating additional supply for the market to absorb.

Even though a Cypriot central bank spokesperson said such a move would need to be approved by the board of the central bank, the ECB president said it would be the decision of the central bank whether Cyprus uses its gold reserves towards the bailout, and proceeds should cover any losses the central bank might suffer from providing Emergency Liquidity Assistance, markets were spooked by the notion of central bank independence being violated.

“We continue to expect net official sector activity to remain on the demand side this year, given that Cyprus remains a unique situation, and new buyers have continued to materialise. Furthermore, sales from Cyprus would be small and any additional sales would still be capped by the central bank gold agreement,” the bank noted.

Cyprus holds 13.9 tons of gold, valued at $697mn when the announcement was made, representing 62% of its total reserves. The European Commission assessment earmarked EUR400mn of gold for disposal ($520mn), initially the equivalent of 10.4 tons.

This would leave Cyprus’ gold holdings at 3.2 tons, with gold’s share of total reserves falling to 26%, still above the international average. But the sale of gold would only represent 4% of the proposed EUR10bn bailout package and 2% of the total funds.

Similarly, it was the broader implications of the Cyprus situation that initially triggered the safe-haven interest in gold, and once again it is the broader concern that other central banks could be asked to dispose of their gold holdings to cover financing needs that has weighed upon prices.

“Our economists maintain the view that contagion risks from the Cyprus situation are likely to be contained given its unique situation with respect to the deposit base relative to GDP, share of non-resident depositors, and that banks in the periphery are now better capitalised and the ECB has provided liquidity,” forecast Barclys.